IPO Prices Boosted By Hype

Initial public offerings (IPOs) involve a great deal of uncertainty, which makes them a relatively risky investment. Thus, investors should receive higher expected returns as compensation for the greater amount of risk that’s associated with them. However, the evidence shows that unless you are well-connected enough to receive an allocation at the IPO price (and then get out quickly), IPOs make poor investments.

Professor Jay Ritter of the University of Florida has done a series of studies on IPO performance, which you can find on his website. His most recent study, updated in April 2015, covered the period beginning in 1980 and includes returns data through 2014.